Can China’s ‘Homegrown Apple,’ Xiaomi, Succeed Abroad?
Can China’s ‘Homegrown Apple,’ Xiaomi, Succeed Abroad?
Xiaomi must boost patents, alleviate security concerns

China’s No. 1 smartphone maker has been in existence for only five years, holds a $45 billion valuation, and was named after a type of grain.

Beijing-based Xiaomi Inc. sold 18 million smartphones in second quarter 2015. It is currently the world’s fourth biggest smartphone maker, trailing only Samsung, Apple, and Chinese competitor Huawei globally, according to IDC, a market research firm.

Xiaomi, whose name translates to “little rice” (millet rice), also makes wearable tech and household electronics. It is progressive and has global ambitions, officially launching its first smartphone outside of Asia this month. But to truly succeed where no previous Chinese tech company has, Xiaomi must keep its foreign operations independent of Chinese politics and continue to offer innovative products at low prices.

Fast Ascent

Xiaomi is led by Lei Jun, who co-founded the company in 2010. The startup attracted big-name investors immediately, including Singapore’s sovereign wealth fund Temasek Holdings (Private) Limited, U.S. chipmaker Qualcomm Technologies Inc., and venture capital firms.

The biggest similarity between Xiaomi and Apple is customer loyalty, especially among the young and tech-savvy.

Its founders, who have backgrounds working at Google and Microsoft, saw Apple as the global leader in the smartphone experience. But there was little alternative besides Apple, especially at lower price points.

Xiaomi uses Google’s Android operating system, and even hired Google executive Hugo Barra to become its VP of international operations.

The company’s model is to make high-spec smartphones and sell them at near-cost prices. Eschewing stores, Xiaomi sells phones exclusively online to cut overhead. All of its smartphones sell for about half the price of a typical Apple iPhone or Samsung Galaxy S in China. Today, Xiaomi also markets a slew of consumer products such as smart watches, external chargers, action cameras, and even a water purifier. But unlike many Chinese products of the past, Xiaomi’s gadgets appear to exhibit high design and high quality.

Xiaomi is frequently called the “Apple of China” and has received criticism that it copies some of Apple’s designs. CEO Lei Jun’s habit of wearing black T-shirts at press events, evoking the image of late Apple CEO Steve Jobs, has become a cliché.

Whether curved corners is a patentable invention can be debated, but the biggest similarity between Xiaomi and Apple is customer loyalty, especially among the young and tech-savvy.

The loyalty and fervor generated by Xiaomi’s fans in side China is unrivaled outside of Apple. Xiaomi is active on social media, with a large presence on Instagram and Facebook and frequently engages customers at a personal level. The company also holds flash sales events for “Mi-fans,” and even throws parties in nightclubs with free giveaways. In turn, customers send fan mail and gifts to company headquarters.

Part of Xiaomi’s appeal comes from nationalism. Wang Wenyong, a fan at a recent Xiaomi party in Hangzhou, told the Wall Street Journal that he “likes Xiaomi partly because it is Chinese.” While unconfirmed, Xiaomi’s name could also be a reference to a Communist slogan from the 1950s, when Mao Zedong referred to the Chinese as being raised on “millet and rifles.”

 

Entering Brazil

This month, Xiaomi made its first foray outside of Asia, launching the Redmi 2 smartphone in Brazil. The Redmi 2 phone features a Qualcomm Snapdragon processor and an 8-megapixel camera. It is already a hit in Asia, selling well in India, Indonesia, and Malaysia.

Brazil is, of course, Barra’s native country. It’s also a huge recipient of FDI from China and a bona fide emerging market ripe for a company like Xiaomi.

But Brazil has high tariffs on electronics imports. This has led to smartphones such as the iPhone and Galaxy S to cost more than $1,000, or 30–40 percent higher than their retail prices in the United States, despite Brazil’s lower wages.

Xiaomi made the unprecedented decision—for a Chinese company—to make its phones locally within Brazil. It contracted Taiwan-based Hon Hai Precision Industry (aka Foxconn) to assemble Xiaomi phones in its Brazil factories.

Thousands of customers and around 130 journalists showed up at Xiaomi’s launch event in São Paulo on July 7. The Redmi 2 phone, which is being sold online for only $160, was sold out within hours.

Checking Global Ambitions

Xiaomi has ambitious long-term goals. Lei Jun said last year that he wants the company to become the world’s biggest phone maker in a decade.

Other Chinese technology firms in the past were viewed as cheap and low-rent, and eyed with suspicion. Compared to them, Xiaomi is innovative and edgy. While it is little known outside of China, it has a devoted following among the Technorati abroad.

But as Xiaomi gets a bigger foothold in foreign markets, it will face major challenges.

The Indian air force accused Xiaomi of sending user data to remote servers located in China.

One is lawsuits. Compared to its global competitors, Xiaomi owns few patents. The lack of an independent legal system in China means Samsung, Apple, and others currently have little recourse to sue Xiaomi. But global competitors—and patent trolls—will be ready to pounce as soon as the company generates enough demand in Western Europe or the United States.

Xiaomi needs to increase its patent base, and make smart decisions on when to stand firm and litigate, and when to acquiesce and sign licensing fee arrangements. It can use Taiwan-based HTC’s foray into international markets 10 years ago as an example. Legal woes will push up costs for Xiaomi, which will likely need to sell phones at slightly higher prices abroad to maintain margins.

The most important decision Xiaomi can make to ensure international success is around security. Given China’s recent record in hacking and espionage, any China firm faces similar issues, especially a technology company that makes connected phones and devices storing personal information.

Xiaomi ran into this problem in India, its second biggest market outside China. The Indian air force accused the company of sending user data to remote servers located in China. According to an Epoch Times report, Xiaomi phones sold there have a backdoor in their firmware that enabled the phone to send information to Beijing. The company claimed it was building a data center in India to store information locally, one of many it plans to set up abroad to abide by local laws.

The company can alleviate those concerns by setting up manufacturing bases outside of China, opening data centers abroad, and ensuring firmware on phones sold outside China does not have backdoor applications. 

This latter demand could be difficult, if not possible to meet, given the ubiquitous control exercised by the Chinese Communist Party’s intelligence agencies. No Chinese company has the ability to push back against the demands of China’s security state. Many large companies, indeed, play up their patriotic values, including Xiaomi (Lei Jun’s presentations often include reference to the “China Dream,” the official propaganda slogan of Party leader Xi Jinping.)

Given recent pronouncements in China about gaining technology sovereignty, and ongoing demands to pry inside the code of U.S. tech and finance firms, the question of political control could be one of Xiaomi’s most serious hurdles—and one that it has little control over. Sophisticated consumers are troubled by the idea that the U.S. government has access to their phone data—and Xiaomi, unwittingly or not, presents the possibility of Chinese intelligence agencies gaining it instead.

Because of all this, there is a lack of trust in Chinese brands in some markets. Xiaomi has branded itself as youthful and fun, and has struck deals with multiple international partners—Uber, for example, to hand-deliver phones in Southeast Asia, and Indian billionaire Ratan Tata, who took an ownership stake—so if any Chinese tech firm can cross this threshold, it will be Xiaomi.

But given the political stakes, whether that is even possible may not be entirely up to the company itself.

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